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Wednesday, November 11, 2009

Charles M. Arlinghaus: City's revenue sharing loss was inevitable

The state's decision to freeze revenue sharing payments was not a criminal act. It doesn't constitute fraud. It isn't unconstitutional. It shouldn't send your town into turmoil, and it's not even a bad idea. It may have a negative impact on the Verizon Wireless Arena, but every change in state law shouldn't lead to a lawsuit.

Manchester's bond payments on the arena are guaranteed by the city's portion of the state meals and rooms tax revenue. Neither the state nor the city is on the hook for anything other than the city's share of that payment, about $4.6 million last year.

It is a risky setup for bondholders because the state meals and rooms payments are not guaranteed and have gone up and down in their short history.

The meals and rooms tax was passed in 1967 to provide additional revenue for the state, but also for the towns. The state tinkered with the share going to towns and eventually took it all. Starting in 1995, state lawmakers decided to bring back some degree of revenue sharing.

They created a formula that started small, but dedicated most of the annual rise in revenue toward increasing the share sent to the towns. In theory, the town share of the total revenue would increase until municipalities were finally receiving 40 percent of the total. Right now, they are up to about 25 percent.

In the last budget, the governor originally proposed suspending revenue sharing entirely for two years. In the end, the Legislature proposed freezing it at 2009 levels for two years.

The state canceled the other major municipal revenue sharing program anyway, and lawmakers were convinced they couldn't cut too much more without burdening towns. Manchester Mayor Frank Guinta at the time fought to restore some of the funding for fear of defaulting on the arena's bond payments.

Any revenue sharing program goes up and goes down. This program has a history over 42 years of rising, sometimes declining, sometimes disappearing entirely. Strangely, bondholders were willing to invest in a proposition secured by such an unreliable source.

If the state behaved as it had in the past, payments would go down. If it behaved as most states do in difficult economic times, payments would go down. If the state ever passed a tax cut (less likely), payments would go down.

The city's bond counsel warned the state that changes to state law might cause a lawsuit. He cited a Washington case to suggest the state can't repeal a tax the city used to pay bonds. But while a state might be obligated if it used a tax to secure a bond, it is just not reasonable to think that state action can be vetoed because of what one city decided to do with its aid payment.

Just as important, there's no reason for anyone to be surprised by this action. The governor's spokesman told the Josiah Bartlett Center when we broke the story on Monday that "Moody's raised this as a risky funding scheme when this was put together, pointing out that meals and rooms revenues are not guaranteed to be constant." There's some fear that bondholders might sue, but they knew the risks at the time and don't have much cause for surprise.

The bond counsel's proposed solution is even sillier than a lawsuit. He suggests that the old version of the law be grandfathered for any city that used the payment to secure bonds. In other words, Manchester would be rewarded for taking a risky decision, while the rest of the state would operate under a different law. Payments to your town would be frozen, but not payments to Manchester.

To be fair, paying for the arena is going to be difficult for Manchester, but every city and town in the state faced similar struggles and similar budget uncertainty. Many towns noticed the financial difficulties the state was having. I think I even wrote about it once or twice.

My own town of Canterbury is a good example of the common sense of citizen selectmen. Canterbury is not particularly frugal, just average. Our taxes have gone up by an average 5 percent each year for the last 15 years. But selectmen knew that state aid was going to be cut, so they didn't count on getting it. Instead, they cut the town budget by 6 percent, and the school budget declined as well. The end result was that our property taxes went down by 8 percent, which was needed relief to people fighting a recession.

The recession has been tough on every budget. It was expected that the state would freeze aid. The right approach is the one fiscally responsible towns have taken. Long-term obligations put pressure on the rest of your budget, but it doesn't have to stop you from cutting taxes even when state aid is frozen.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.